LECTURE ON “THE CHALLENGES OF NATIONAL REFORMS IN THE CONTEXT OF THE ECONOMIC CRISIS” AT THE INTERNATIONAL SYMPOSIUM ORGANIZED BY THE INSTITUTE FOR CULTURAL DIPLOMACY BERLIN, FEBRUARY 2010

We are in the midst of a crisis. Some feel that the recovery is coming and the tide will lift all boats. They argue that we shall then continue happily to do business as usual, without any need to effect fundamental changes in our institutions and in the global allocation of resources.
Let me say at the very beginning that this view which is not supported by facts is naive and dangerous.
We must accept that the system has been derailed and, to put it back to its rails, it calls for policy action at the global and national level.
The essential feature of the multi-dimensional crisis we live in, is its global character. The issues cannot be contained within the national frontiers, partly because we live in an open, globalized and interdependent world and partly because of the very nature of the issues.
Unfortunately, the international mechanisms have been incapable to deal with the threatening issue of global warming and the protection of environment. Furthermore, the international system failed to advance regulatory reforms for capital movements, banking practices and to deal with the structural imbalances between surplus and deficit countries. Nor have we been able, at the international level, to establish meaningful migration policies, in the face of our inability to reduce the gap between rich and poor countries. I can go on and give you more examples but I think that these are sufficient to make the point.
Now, failure to deal effectively with such global issues has shifted the brunt of adjustment to national governments. But governments are ill-equipped to address themselves to those issues and, in general, have been very reluctant to take decisive action.
This gap between the need to reform and the capacity to reform constitutes a major threat to the functioning of our democracies.
In real life, vacuum does not exist. In fact, the inability of government to proceed with systemic changes led to an interesting development:
Changes, indeed radical changes, were effected in the past from the backdoor. What actually happened is that politicians were relieved to turn over issues which traditionally belonged to the sphere of political democracy – such as full employment, income redistribution and welfare policies – to the market forces. This is the game of passing on the hot potato from the international system to national governments and from national governments to the market forces.
Indeed, the surrender of important areas of political nature to the market forces in the 80’s marked the ascendancy of neo-liberalism as the new global paradigm, and the decline of social democracy.
The recent crisis, however, destroyed the myth that market forces are efficient and self-regulating mechanisms and we are now back to the common sense paradigm that in our market-based but not market-driven system we do need a regulatory framework. The game of passing the hot potato is over!
This is the challenge that the governments face and they have to respond as best as they can.
The question that arises is what are the minimum pre-conditions that must exist, in order to ensure success in reforms at the national level, in the context of the present global crisis.
I wish to offer some thoughts on this very difficult question, but first let me divert a bit and discuss some definitional issues.
There are many definitions of “Reform” and the literature offers alternative taxonomies to distinguish among different kinds of reforms.
For the purpose of this lecture, I am satisfied with a simple definition: “Reform is a – democratically agreed – set of policies with specific objective and policy outcomes which, inter alia, involve substantial shifts in the distribution of the economic, social and political power among major social groups as well as significant changes in the institutional structure.” It follows that not all policy changes constitute “reform”. We are concerned about systemic changes.
When the system functions satisfactorily, policy changes required to keep the train on its rails do not constitute reform but “fine tuning” of the system. For example, a change in tax rates, or a substitution of a policy instrument by another to achieve the same objective do not constitute reforms. An example: a change from price subsidization to income support policies for the farmers.
Having cleared the meaning of reform, let me now turn to the taxonomy of reforms: We usually distinguish reforms on the basis of twofold criteria:
1. Externally vs. Internally induced reforms.
2. Broadly-based systemic reforms vs. sectoral reforms
A few words for each category:
Externally induced reforms may emanate from pressure of capital markets, from the prevailing global paradigm or international organizations. The characteristic feature of this category is that legitimacy stems from the acceptance that the country has no other option but to adjust to international norms or obligations.
The IMF stand-by agreements, or the conditions imposed in the context of stabilization and development plans in the E.U. are examples of this category.
On the after hand, internally induced reforms emanate from the domestic dynamics. Reforms relating to pensions and social security program are example of this category.
I am passing now quickly to the second distinction:
Broadly based systemic reform: Here the changes embrace the entire system. Prevailing norms, values and institutions are challenged.
On the other hand, sectoral reforms do not question the validity of the hard core values, institutions and rules of the functioning of the system but limit themselves to changes of a specific sector. Reforms in the areas of Agriculture, Health, Education and Social Insurances and Pensions are the more prominent ones.
To be sure, each category has its own characteristics and faces different challenges. I am afraid that time does not permit me to expand on those differences but I wish to assure you that the conditions which determine whether a reform effort will be success or failure are, by and large, the same. So, with some oversimplification, I shall lump them all together in my discussion, although what primarily I have in mind are the broadly base systemic reforms.

Let me know turn to the question I posed earlier: What are the minimum pre-conditions that must exist for a reform to succeed? Having spent most of my professional life in international organizations and in my government with issues relating to reforms, I have come to some conclusions which I wish to share with you.
To my mind, a successful reform requires the influence of many factors, of which, I single out the following five as the most important:
1. Favorable external environment: It is important that the set of policies which constitute the reform is consistent with the prevailing global environment or, to put it differently, the reform undertaking will be facilitated if the prevailing global paradigm is “friendly” to the orientation of the domestic reform. I am not saying that it’s impossible to push through a domestic reform in the face of hostile international environment, but let me tell you, from my own experience than in such a case, the task becomes extremely difficult.
2. Strong and charismatic political leadership which can capture the hearts and minds of people with very clear and simple signals and move them towards a shared vision.
3. High degree of cohesion among the forces which support the reform agent. In our democracies, the government’ rely on parties which are coalitions of various and at times differing social groups. For the credibility of the reform and its successful implementation, it is essential that the parliamentary group which supports the government as well as civic society, show a strong solidarity. Loose cohesion and shift of vote or even the threat to switching position either by some parliamentarians or social group, is a certain prescription of failure.
4. Lack of emergence of organized minority groups either political or civic which may advance their opposition in a way that may become veto players. Veto players, usually appear at a later stage when the reform is in the phase of implementation. Strikes, demonstrations or actual obstraction of the implementation process can bring the reform to an impasse.
5. Persistence in the pursue of the objectives of the reform and consistency over time. The implementation of a reform requires time. It’s not unusual that as time goes on, it may lose political steam or it may be superseded by other political priorities leading either to its negation or to its political devaluation.

Some of you may be surprised to notice that I did not include among the five major pre-conditions the need for a reform to be the outcome of a consensus process. I owe therefore an explanation. Indeed, during normal periods, policy packages emerge from consensus building, where a balance is obtained among the various and different needs of the social groups. This is what our democracies can do and have done very well during normal periods. But, in moments of crisis, we don’t need this balance. What we need is to ask the social groups to transcend their narrow interest and to join forces for a new vision, a new situation even if in the short – run, their interests are not served.
I feel that it’s a top – bottom process, and that’s why I place emphasis on the second condition, namely on the need for the political leadership to lead the reform. The support will follow and the consensus will emerge in the process of the implementation of the reform.
It is tempting for me to examine reforms under way, either in the E.U. or in selected countries, from the stand point of these five pre-conditions. This, I am afraid, will lead the discussion to controversies which are extraneous to my topic. I find it safer, therefore, to illustrate the relevance of those pre-conditions by drawing examples from the safe past.
For purposes of illustration only, I chose two “success” cases in the sense that the reform was implemented and its effects remained many years later on, and three cases where the reform aborted or was reversed before it had the chance to leave its print on the institutions of governance or on the economic and social structure.
I draw my first example from the classical case of Roosevelt’s New Deal. The external environment was very favorable indeed. The world was in the midst of a great depression and people were ready to accept fundamental changes over a very broad range. Roosevelt himself, provided charismatic leadership and succeeded in rallying the American society to support his New Deal. The cohesion around the reform agent remained throughout solid while the opposition, political and social, could not organize itself to become a veto player. The unprecedented 3-term presidency of Roosevelt together with the advent of the second world war, provided the New Deal with the necessary depth in time to instill the changes on the social and economic fabric of the United States.
Less known but quite interesting was the reform of the first post war labor government under Attlee in the U.K. There, again, the external environment was favorable to the socialist program of Attlee. After all the people became accustomed during the war to price controls and direct government involvement in the production and distribution of goods and services. Besides, people, after the war, wanted and needed badly a strong welfare state. Attlee himself not an especially charismatic figure, had in his cabinet exceptional personalities and together managed to provide the inspirational leadership which was required. The cohesion of the reform front was satisfactory while the opposition was slow in mobilizing, giving thus time for the reform to gain strong roots in the socio-economic system. Many of the institutional reforms of that period survived subsequent government changes until Thatcher came to power, many years later.
The Alliende socialist reform tells us a different story. First of all the external environment was extremely unfavorable. In the midst of the cold war, the “west” was not prepared to accept a democratic socialist experiment in Latin America, especially after the experience with Castro in Cuba. Multinational firms with high stakes in the mining sector of Chile were openly hostile. Alliende was an especially charismatic leader who managed to rally the majority of people behind him, in the first phase of the reform. Wide ranging reforms (nationalizations, agrarian reforms, price control and income redistribution policies etc) were planned to transform the economic and social structure. However, the political cohesion was rather loose and as the implementation of the reform proceeded, dissatisfied social groups, farmers, middle class professionals blocked the process. In other words, with substantial encouragement and subversive help from abroad, they became the veto players. Finally, the sharp social division opened the door to brutal repression by the military coup under Pinochet.
The socialist experiment of Mitterand during the first three years of his first term provides us with some interesting features. The external environment was not openly unfavorable but the ascendancy of Thatcher and Reagan signaled the beginning of what we now call the era of neo-liberalism. However, France being a relatively large and economically strong country could decide on its internal agenda with less dependence from the external factor, something that was not true in the case of Chile. Mitterand was an impressive and charismatic leader and managed to articulate effectively the wish of the electorate for change. The political cohesion was also high. Wide ranging reforms which included nationalizations, state controls and planning as well as ideas of “managed trade” proceeded with popular support and without the emergence in the scene of veto players. The reform came to a stop after three years and then subsequently was reversed, not because the efforts failed – on the contrary the program was proceeding satisfactory – but because Mitterand changed the priorities of his political agenda. He apparently considered that it was better for France to essentially abandon its solitary socialist experiment and to enhance the European Integration by promoting the Franco-German cooperation.
The Papandreou socialist reform in Greece, which took place at the same time as that of Mitterand, followed the same pattern, with the difference that the negative impact of the international environment was much more pronounced since Greece is much smaller and economically weaker country. Papandreou was too a charismatic leader and managed to develop an impressive and strong majority to support his wide-spread economic and social reforms. With strong cohesion and the opposition in disarray, the reform program was implemented speedily during the first term 1981-1985. Then, again, in spite of the significant progress in implementing the reform plan, Papandreou changed abruptly the priorities of the political agenda. Following Mitterand, he considered best for Greece to go “European all the way” and abandon his mild socialist experiment. We must not forget that at that time, many European countries were turning their back to the welfare schemes of the post-war social democratic consensus.
It is not difficult to realize that given the nature of the international crisis, it will be difficult for a country to meet all those five preconditions. First of all, the external environment is unfriendly to social and institutional reforms that people in our countries demand. Charismatic leadership, in a position to rally the people to a new course has not emerged. The cohesion of governing conditions is very loose. Veto players play a catalytic role in frustrating reform efforts.
I am not saying that it is impossible for a country alone to succeed, but I want to stress how difficult and painful it will be.
That’s the why I come back from where I started, namely the need to confront the issues at the global lever and in a spirit of solidarity and true cooperation. I must say that I am not optimistic about this outcome either.
But, there is one thing that we can and should do. We should try to find a collective solution within the E.U. What each country cannot do alone, all together can do it. To be sure the institutions of the E.U. were not meant to deal with the crisis of the type we are facing now. We must certainly reform the system of the E.U. governance. It’s a big task but we should not be pessimistic. We faced difficulties before and we managed to solve them. Why can’t we do it again? Yes, I think we can.